Maintain ‘buy’ on Shriram City Finance with TP of Rs 2,527

Published: May 1, 2018 2:09:21 AM

SCUFs 4Q results were bogged down by the shift to 90DPD. Higher provisions (led to a significant miss on net earnings. Opex also jumped primarily driven by higher staff costs as SCUF built up higher bench strength.

SME and 2W GNPAs led the pack with QoQ accretion of 317/275bps to 9.86/10.03% respectively.

SCUFs 4Q results were bogged down by the shift to 90DPD. Higher provisions (led to a significant miss on net earnings. Opex also jumped primarily driven by higher staff costs as SCUF built up higher bench strength. Additionally, the dip in NIMs was owing to yield pressure. High PCR despite the shift to 90DPD was heartening. We believe there is immense potential for SCUF in the SME space given the government’s focus on this segment. Optimizing branch productivity (90% business comes from merely 335 branches) and the maturing system of standardized sourcing and underwriting will be key drivers of SME growth. With a well capitalized B/S and wide spread presence, we believe growth revival is a given. Dip in provisions and a tight leash on costs will boost return ratios 49bps over FY18-20E. Maintain BUY with TP of Rs 2,527.

Disbursements grew merely 6/4% YoY/QoQ. SME and PL disbursements registered strong growth of 28% and 18% YoY while 2W and Gold loans declined sequentially. The mgt believes the gold loan business will continue to face growth hurdles in the near term. As macros improve and SCUF sees increased benefits of system optimization, we believe disbursements growth to accelerate to 14% over FY18-20E. Provisions at Rs 410 crore doubled sequentially as SCUF shifted to tighter NPA recognition. The management attributed Rs 140 crore of these to the shift. While credit costs have been elevated over the last couple of years, the management expects these to normalize to 3% by FY20E as asset quality improves.

Robust AUM growth continued largely driven by a ramp up in PL, and 2W. SME loans also grew 22/7% YoY. Gold loans continue to shed share as more borrowers shift to unsecured PL and regulatory pressures persist. We have factored in an AUM growth of 20% over FY18-20E. As expected, GNPA spiked 40% QoQ as SCUF shifted to 90DPD while NNPAs at R940 crore more than doubled YoY to 3.4%. Owing to this shift, sizable expansion was seen across segments.

SME and 2W GNPAs led the pack with QoQ accretion of 317/275bps to 9.86/10.03% respectively. While the management expects moderation over FY19, we have conservatively factored in GNPAs of 8.65/8.05% over FY19/20E.